Many, but not all, franchises grant an “exclusive territory” to their franchisees as part of the rights given under the franchise agreement. The purpose of doing this is to assure the franchisee that they will have some area in which they can market and operate under the franchise brand without any competition from another franchisee or even the franchise company itself.
This territory is normally described in geographical terms (zip code, street or waterway boundaries, etc.) though it can also be described as a specified radius originating from the actual location of your unit. Regardless of the method used to define the boundaries of the territory, the message implied by the territory award is always the same. In a nutshell, you’re being told that this area is large enough and has a sufficient number of potential customers to enable you to build a successful business for yourself.
This is where a conflict can come into play. As the franchise system continues to grow, the franchisor will often desire to increase their number of distribution points by adding as many additional units into the market as possible. Sometimes these units can cannibalize the sales of existing units, temporarily or permanently. That “encroachment” can cause a lot of ill will among the existing franchisees. Whenever you are evaluating any franchise, be sure to ask the existing operators whether they feel that the territory structure is fair and reasonable, and ask them as well as the franchisor whether there is an appeal process in place to allow for the resolution of any new unit impact conflicts without having to resort to litigation. These types of steps can help ensure that you are selecting a franchise with a strong sensitivity to these sorts of potential issues.
What is Franchise Exclusivity?
Because franchisees pay a franchise fee and ongoing royalties, the franchisor wants to ensure the franchisee makes enough money. As a result, most franchises assign each franchisee a territory in which the franchisee has exclusivity.
Let’s use McDonald’s as an example. Maybe you’re planning to become a McDonald’s franchisee. Exclusivity simply means that no other McDonald’s can be built within a certain radius of your restaurant. That means another franchisee cannot just move in down the block and take customers from your restaurant.
How is a Franchise Territory Decided?
Mapping territory to be divided among franchisees can be tricky and some franchises just don’t get it right. However, there are several factors that go into mapping territories, including the success of the franchise. A globally successful franchise like McDonald’s will typically offer much smaller territories because they are so popular and so well-known that getting customers into the door is pretty easy. So, you may find a McDonald’s in relatively close proximity anywhere you go in the world.
However, Bob’s Burger Pagoda may offer a larger territory because it isn’t as well-known, which means a franchisee may need a larger territory to bring in a sufficient amount of business.
Many franchises also use mapping programs that allow them to analyze the best way to divide a city or even a region, taking into consideration such factors as population and distance between franchises.
What Questions Should I Ask a Franchise?
Before settling on a franchise, be sure to answer the following questions:
- Are territories exclusive or non-exclusive? (Non-exclusive means another franchisee can move into your area.)
- How does the franchisor map the franchisees’ territories?
- Is the population in your potential territory large enough to run a viable business?
- Will you be permitted to choose your own territory?
- How close will the nearest franchisee be situated?
- Will you be permitted to open another location in the future?
What is the Right Way to Build a Territory?
A fundamental principle of running any business is to know your customer. Is the company selling fertilizers to farmers, clothing to teenage girls or vacations to older retired people? The differences are obvious in this comparison.
The characteristics of the customers are defined by the demographics. To be successful, every business owner has to know the demographics that describe the customers and what trends, or changes are happening in those specific characteristics.
Customer Demographics and the Perfect Customer Profile at 40,000 Feet
Customer Demographics are the generalized character traits of the people who you sell to and who you would want to become your customers in the future. They are broad and somewhat interesting to know about for certain kinds of marketing.
The Perfect Customer Profile is almost the exact opposite of that. It is picking (developing a profile) for one single person that you will be selling to and developing a sales funnel and copy that centers around that person.
What are the Primary Demographic Characteristics?
A demographic profile is generally defined by the following categories:
- Marital Status.
- Home Ownership.
- Geographical location.
- Race or Ethnicity.
Territory Analysis & Understanding Your Franchise Market
A franchisee’s territory represents the foundation of your business. It’s where your customers, revenues and increased growth will come from.
Your territory is protected and defined based upon specific demographics; a detailed and consistent method for identifying, defining territories, and market considerations.
Franchisors in home and commercial improvement industries should identify & map out territories by targeting residential and like commercial variables.
Identify potential customers by leveraging customer data and location performance data combined with household-level analytics to determine:
- WHO the best customers are
- WHERE more of the best customers are found
- The VALUE of existing and potential customers
This will provide us with a granular view of the customers, aiding in understanding of their characteristics, affinities and lifestyles, marketing and media consumption preferences and more.
by Vince Ortiz
Share your experience with franchise territories with us in the comments! Has your franchisor helped you shape your territory for maximum profits? As a franchisor, how do you determine how many franchises can exist per region?
And if you’re ready to learn more about Transblue’s franchising opportunities, download our franchising guide to get started!